Q2 2022 Escalade Inc Earnings Call

Good day and welcome to the escalator incorporated second quarter 2022 results conference call all participants will be in listen only mode.

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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.

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Please note this event is being recorded.

I'd now like to turn the conference over to Mr. Patrick Griffin, Vice President Investor Relations. Please go ahead.

Thank you, operator, and Patrick Griffin, Vice President of Investor Relations and corporate development.

And behalf of the entire team at escalate I'd like to welcome you to our second quarter 2022 results conference call.

Leading the call with me today are president and CEO , Rob Glaser, and Stephen Ward Chief Financial Officer.

Today's discussion contains forward looking statements about future business and financial expectations.

Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC.

Except as required by law, we undertake no obligation to update our forward looking statements.

At the conclusion of our prepared remarks, we will open the line for questions with that I would like to turn the call over to Walt.

Thank you Patrick and welcome to those joining us today.

A period of rising macroeconomic challenges and ongoing supply chain complexities our team displayed the creativity and agility that has enabled escalate to thrive throughout our 100 year history.

During the second quarter, we continued to focus on delivering a unique customer experience with our diversified portfolio of niche sports games in outdoor products, while leveraging the benefits afforded by our hybrid domestic manufacturing and global sourcing capabilities decentralized organizational structure and lean operating model.

Through the first six months of the year, we delivered year over year growth in revenue and EBITDA, while continuing to support a stable quarterly cash dividend, which currently yields four 6% on an annual basis.

Before we move into a more detailed discussion of our second quarter results I'd like to share. Our observations are they current macroeconomic environment and specifically, how we are managing our business to effectively navigate the impacts of rising inflation ongoing supply chain complexities and shifting consumer sentiment and behavior.

Let's begin with the actions we are taken to mitigate cost pressures created by substantially higher inflation.

The June producer price Index was up 11, 2% year over year, which is near the March record of 11, 6%.

<unk> represents the average input costs for producers like escalate and that's been notably higher than the CPI, which represents cost increases borne by consumers.

We like many of our peers are grappling with the rising cost of labor transportation, and raw materials, including wood steel aluminum plastic resin and packaging in.

In response to these cost pressures, we are accelerating our cost reduction initiatives throughout our organization.

We're also optimizing our product assortment and introducing innovative new products to deliver great value to our consumers while enhancing our margins.

Some recent highlights include our trophy rich digital react archery side as well as the Silverback SB 60 Ghost basketball system.

Lastly, we have implemented a series of selective price increases demonstrating the pricing power within our portfolio of strong brands and unique products.

As has been widely documented the global supply chain remains challenging deliveries. It used to take weeks are now taking months due to longer factory in shipping lead times on a positive note.

Freight rates have declined from recent highs, but remain elevated from historical levels.

Stronger U S. Dollar is also helping to relieve some of these inflationary cost pressures with our sourcing footprint outside the USA.

We're also starting to see some moderating of certain commodity prices.

As discussed last quarter, we continued to utilize our hybrid sourcing model that leverages, our domestic manufacturing and international sourcing capabilities to enhance our competitiveness.

Additionally, we continue to diversify our international our international sourcing across multiple regions as we build a more durable and responsive supply chain.

Finally, a word on the consumer anecdotally during a period of rising inflation low to middle income households are particularly impacted by higher food and fuel costs.

Currently real wage growth isn't keeping up with the pace of inflation, particularly for lower income households. These.

These trends coupled with reduced government stimulus are softening demand, particularly for opening price point products.

Higher income households are currently being impacted by significantly lower asset prices, including equities from the recent stock market declines.

Meanwhile, rapidly increasing interest rates are impacting the ability for many consumers to finance larger ticket items, such as new homes in autos.

<expletive> savings rates are below pre pandemic levels.

Scalade typical consumer profile generally skews toward a mid to higher income household. While these households are better positioned they are not immune to the economic challenges facing consumers.

The U S consumer sentiment index is down nearly 40% year over year, reaching its lowest level since 2011 and impacting consumer buying behavior, we are experiencing lower consumer demand and our outdoor categories, including archery and water sports as well as in our fitness category.

As a result, we are also seeing higher retailer inventories and lower orders as retailers seek to appropriately manage their inventory levels.

We believe longer term behavioral shifts such as the increased trend toward hybrid work arrangements and healthy active lifestyles remain intact. We expect these trends coupled with increased participation rates across many of our categories will benefit us over time.

To that end, we continue to capitalize on our leadership positions in niche product categories, where our customers tend to be brand loyalists, who value the quality of our product experience.

We are mindful of the potential downside risks that could materialize given the possibility of recession.

Continue to plan for a range of scenarios.

An example, we remain vigilant regarding expense control as evidenced by our lower absolute SG&A expenses in our legacy businesses. During the second quarter. We also continue to optimize our promotional planning and product assortment to address changing consumer preferences. We are confident we will manage through this market cycle well as.

We have in the past.

Turning now to a discussion of our second quarter performance.

While net sales declined five 4% on a year over year basis, we maintained our gross margin percentage equal to last year we.

We successfully navigated rising material logistics and labor cost with the help of pricing product and productivity initiatives that I mentioned earlier.

Second quarter net sales, excluding acquisition declined 13% due to softness in fitness and select outdoor categories combined with the previously previously announced basketball revenue pull forward from the second into the first quarter of 2022.

The integration of our recently completed Brunswick Billiards acquisition has progressed ahead of plan and is expected to be accretive to earnings in the second half of 2022, we.

We completed brunswick's transition to escalate it platform and ended our transition services agreement ahead of schedule in the second quarter.

We believe this acquisition will allow for a meaningful cross selling synergies across our $1 billion in into our recreation categories, which have also outperformed in the recent market environment.

Following our second quarter, and we exercised a portion of our accordion availability expanding our senior revolving credit facility maturing in 2027 by $10 million.

As of July 9th we had total cash and availability of approximately $13 5 million. Excluding this additional 10 million granted under the accordion feature.

Notably we have an additional 15 million that could be exercised under the accordion further increasing our availability should we choose to do so.

Total inventories were $130 million at the end of the second quarter up from $86 million in the prior year period due to the addition of the Brunswick billiards inventory as well as prior purchases of long lead time items in 2020, and 2021 exacerbated by slowing demand and retail order cancellations and <unk>.

Recent months at the beginning of 2022, we implemented a companywide program to reduce inventory in anticipation of the normalization of consumer demand and supply chain conditions.

As a result, our income or our.

Incoming order flow has been reduced and we anticipate improved inventory turns by year end with further improvements towards our historical turns of two five to three times in.

In 2023, which will improve our cash conversion cycle.

We continue to invest in our brands to position positioning them for long term category leadership.

As an example, onyx pickle ball, leading pick a ball Brown brand is proud to be a sponsor of the PPA tours, including Skechers Invitational Summer Championships, which will be held August 12 to 14th in Pacific Palisades, California and featured live on the CBS television network.

Further several of our team Onyx sponsored players, including number one ranked players, Matt right and Lucy Coe below that as.

As well as number two ranked player Kelly Joe Smith will be featured in live marquee matches on CBS .

There'll be playing with our Onyx Evo Premier patent Pickle ball paddles.

Sure to tune in and catch the action.

Unexpected ball was also the official title of a P. P opened recently held in New York City.

<unk> took a ball or juror fast 40, pickle ball the ball of choice for professional players in top tournaments is the official ball of all PPA tour events.

We've demonstrated a commitment to effective capital allocation and disciplined balance sheet management and approach that contributes to long term value creation looking.

Followed by continued investments in organic growth initiatives and a consistent payment of a quarterly cash dividend.

With that I will turn the call over to Steven for a review of our recent financial results.

Thanks, Paul and welcome to those joining us on the call today for the three months ended July nine 2020 to escalate reported net income of $5 7 million or 42 per diluted share on net sales of $94 3 million. The company reported gross margin of 25, 2% flat to prior year.

Our period, despite continued challenges related to the global supply chain raw material cost inflation and labor constraints.

Selling general and administrative expense as a percentage of net sales increased to 15, 6% in the second quarter 2022 versus a 13, 9% in the prior year period due to lower sales volume and expenses related to the acquisition and integration of Brunswick Billiards S.

SG&A expenses for the legacy business units were down year over year on an absolute basis.

Total operating cash flow less capital expenditures was $1 $7 million in the second quarter versus $6 9 million in the prior year period.

Earnings before interest taxes, depreciation and amortization declined 15, 7% to $10 $3 million in the second quarter 2022 versus $12 $3 million.

The prior year period for the six months year to date EBITDA increased one 5% to $20 9 million versus $26 million in 2021.

As of July nine 2022, the company had total cash and equivalents of $6 2 million together with $7 $3 million of availability on our senior secured revolving credit facility maturing in 2027 as Walt indicated this availability increased by $10 million in July following the close of our second quarter.

We exercise exercise a portion of the accordion on our senior secured credit facility at the end of the second quarter 2022, net debt outstanding or total debt less cash was $2 five five times trailing 12 months EBITDA, we announced a quarterly dividend of <unk> 15 per share to be paid to all shareholders of record on September .

Six 2022 and dispersed on September 13, 2022 with that we will turn the call over to the operator to begin our question and answer portion of the call.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Are using a speakerphone please pick up your handset before pressing the keys.

Anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then queue. At this time, we will pause momentarily to assemble our roster.

The first question comes from Rob <unk> with <unk>.

Discounts at all.

Hi, Good morning, Thanks for taking my question just a COO.

Question on gross margins you guys maintain them in a year over year basis switch.

But a lot of companies.

Do that these days.

All the cost pressures you're seeing.

I know, you've obviously put through some significant initiatives some price increases but is there a positive mix shift also taking place with regards to your product portfolio. That's also helping drive that thanks.

Sure. Thank you Rommel that's a great question and I would say, primarily it's an issue of.

Careful purchasing and.

Selective price increases our hope was to really match the prior year gross margin match our margins.

Protect those but also deliver as much value as possible to the consumer but there is some.

Mix shift going on and as we discussed in the call. We're seeing the higher end products doing better than the than the lower end products and as an example, you know in our.

Our basketball business the.

Our goals with a 72 inch backboard are outperforming the 60 inch goals, which are outperforming the 54 inch goals.

And those in turn are outperforming a 50 inch calls so we see really a significant.

Trend toward.

The higher priced feature rich items doing better then.

The lower priced items in our portfolio.

Okay, and just a quick follow up if I may.

In terms of the macroeconomic outlook, there's some talk obviously that.

Shoot it may drop as the housing market could you just maybe refresh our memory given the change in your product portfolio with acquisitions over the years since the last sort of housing market downturn.

How would you expect to see the impact play out on your various business units would that be you know billiards.

Billiards and basketball the most impacted if there were any.

Weakness in the EMEA.

Housing market. Thanks.

Yeah. Thank you you know of course every recession is different in every economic challenge is quite different. So after 911, we saw a significant increase and so we're cocooning and people investing in their homes.

The 1 billion business for example did quite well of course as we all know after the.

Economic.

<unk> of the 2008 2009.

A lot of people lost their homes and investments in homes declined quite significantly.

We'll see how how this one plays out but we would note that.

There's a lot more household formation wild.

While prices and housing are coming off recent highs. They are still a lot of people who want to own a home who are moving into more suburban locations with bigger yards and bigger homes and so we think that those things will.

Continue to benefit us and I would note that our indoor game categories continues to do do quite well.

Okay. That's very helpful. Thanks very much.

Thank you once again, if you have a question. Please press Star then one.

Yes.

Ladies and gentlemen, this concludes our question and answer session I would now like to turn the conference back over to Mr. Patrick Griffin for any closing remarks.

Once again, thank you for your interest in escalate and joining our call should you have any questions. Please feel free to contact us at IR Escalate, Inc. Dot com and.

A member of our team will follow up with you.

This concludes our call today you may now disconnect.

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